UBS Bid to Dismiss FHFA Mortgage-Bond Suit Denied

UBS AG lost its appeal of a ruling that allowed the Federal Housing Finance Agency to continue pursuing legal claims against the bank over the quality of loans tied to $6.4 billion in mortgage-backed securities.

UBS, Switzerland’s largest lender, alleged that the suit was filed too late under federal law. The U.S. Court of Appeals in Manhattan ruled today that the Housing and Economic Recovery Act of 2008 extended the filing period for such suits, affirming a May ruling by U.S. District Judge Denise Cote in Manhattan.

“As HERA makes clear, Congress intended FHFA to take action to collect all obligations and money due” to government-sponsored Fannie Mae and Freddie Mac, the judges said in their opinion. “Congress obviously realized that it would take time for this new agency to mobilize and to consider whether it wished to bring any claims.”

Megan Stinson, a spokeswoman for UBS in New York, didn’t have an immediate comment on the appeals court’s ruling.

FHFA alleged that Zurich-based UBS misrepresented the quality of loans underlying $6.4 billion in residential mortgage-backed securities purchased by Fannie Mae and Freddie Mac, according to the opinion. FHFA was appointed conservator of the mortgage financiers in 2008.

Test Case

The case is one of 17 filed by the FHFA against major financial institutions over alleged misrepresentations regarding mortgage-backed securities totaling more than $200 billion, according to briefs filed in the appeals court. Of those, 15 are currently before Cote, who designated UBS’s bid for dismissal as a test case, according to a joint brief filed by the other banks.

The lenders, including Bank of America Corp., Barclays Plc and Citigroup Inc., told the appeals court in their November brief that Cote’s decision was erroneous and would have “enormous impact” on financial institutions by increasing their exposure to state and federal securities claims.

In a separate brief filed in September, the Securities Industry and Financial Markets Association said the district court’s ruling expanded the scope of time-limit provisions in the housing recovery law beyond what Congress intended.

‘Plainly Drafted’

“SIFMA’s members and other market participants rely on the application of the securities and other laws as they are plainly drafted,” the group wrote. “When courts rewrite statutes based on intuitions as to what Congress would have preferred to have said, uncertainty and arbitrary decisions result.”

The U.S. Justice Department argued that lawmakers “reset the limitations clock” on the securities claims when they passed the housing and economic recovery act. The law provided for the creation of the FHFA, which was intended to help fix financial troubles at Fannie Mae and Freddie Mac caused by the housing crisis and the plummeting values of its mortgage-backed securities, according to a brief the department filed in November.

“Congress specifically contemplated the FHFA would bring litigation on behalf of the entities for which it acted as conservator, and took steps to ensure that the new agency would have adequate time to do so,” the Justice Department said in the filing.

‘Grossly Inequitable’

Separately, the banks in all 15 cases in Cote’s court filed a request with the U.S. appeals court March 26, claiming her pretrial rulings created a “grossly inequitable, clearly erroneous framework for litigation” in what they called “perhaps the largest collection of securities litigations ever filed in the United States.”

The banks argued that Cote wrongly denied them the ability to seek evidence on many potential legal defenses, including what Fannie Mae and Freddie Mac knew about the practices of loan originators whose mortgages backed the securities involved in the suits.

Some of Cote’s “gravely prejudicial” rulings were aimed at pressuring the banks to settle, they said in court papers.

The case is Federal Housing Finance Agency v. UBS Americas Inc., 12-03207, U.S. Court of Appeals for the Second Circuit (Manhattan).

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